You think $78 a barrel for Brent crude oil and $3 a gallon for petrol is high? Wait until the winter and today’s prices will seem like a bargain, warns Goldman Sachs.

Oil prices have risen within a whisker of their all-time highs. On Monday Brent crude oil hit an intra-day high of $78.40 a barrel, just 25 cents below last August’s all-time high of $78.65 a barrel (here the FT’s story). Investors cashed in their profits on Tuesday sending Brent crude oil down to $76.00 a barrel.

Looking ahead, the US investment bank said on Monday in a report that oil prices could hit $90 a barrel by the autumn and $95 in winter unless the Organisation of the Petroleum Exporting Countries increases its output.

Jeffrey Currie, of Goldman Sachs in London, said: "An increase in Saudi Arabian, Kuwaiti and United Arab Emirates production by the end of the summer is critical to avoid prices spiking above $90 a barrel this autumn."

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The International Energy Agency, the industrialised countries’ energy watchdog, on Friday said oil demand in 2008 will grow by 2.5 per cent to 88.2m barrels a day (the FT story is here) in spite of record high oil prices.

It also called for Opec to increase its output to avoid a tight oil market in the second quarter of the year. Oil prices, meanwhile, are rising.

The acceleration in demand growth of 1.5 per cent this year suggests that the traditional relationship between oil prices and demand is breaking apart. Or is it?

If you have asked the Energyfilter team five years ago what would happen with oil demand if prices averaged in any year $65 a barrel, the response would be: a sharp drop! For the record, Brent oil price averaged $66.1 a barrel in 2006 and so far this year the price average is $64.5 a barrel.

But prices still matter, although far less than they did in the 1980s and 1990s. Last year, the IEA also projected strong demand growth for 2007, only to be forced to cut that estimate as ongoing oil prices dent some of the consumption increase.

That transformed a forecast published just a year ago for oil demand growth in 2007 of 1.8 per cent to another now of 1.5 per cent. Still, that is peanuts if you think about how tight supply is.

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The International Energy Agency, the industrialized countries’ energy watchdog, on Monday warned on a crude oil “supply crunch” in the next five years on the combination of strong consumption and lagging supply.

The IEA said that “oil looks extremely tight in five years time” and there are “prospects of even tighter natural gas markets at the turn of the decade.”

Although the energy watchdog is not in the business of predicting oil prices, analysts said that the IEA’s balance of supply and demand pointed to a growing risk of higher oil prices to 2012. However, an increase in refinery flexibility and capacity could help to ease the price pressures.

In summary, here is the bad, the very bad, the good news and debate:

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Once again, there has been a flurry on the web in several places, some of them unexpected, about a possible BP merger with Shell. The FT has long reported that the idea of a merger was kicked around by BP in 2005, when its management was one of the most respected in the world. (FT story may require subscription.) Then, BP was riding high, and Shell was weakened by the scandal over reserves misreporting that broke in 2004.

Now, the positions are reversed. The logic of merger still applies, however, and so do the arguments against. On the pro side, there would be a lot of duplicated costs that could be saved, and perhaps a way to unlock the hidden value that some analysts have found in Shell and BP. One the con side, there are the terrifying regulatory issues in the dozens of different jurisdictions in which the two countries operate. The management challenge of integrating the two companies would also  be horrendous, and a dangerous distraction from what should be their real focus now: getting their operations right and finding more oil and gas.

But perhaps even more than that, there is the quiestion of personalities. Who would end up running the company created by this supposed "friendly" merger? At BP, Tony Hayward has only just climbed to the top of the greasy pole to become chief executive. At Shell, Jeroen Van der Veer deserves longer to enjoy the rewards of having steered the company into calmer waters, and the board has given him just that. Why on earth would either of them choose to play second fiddle?

US and Eurpean biofuel related demand of agriculture commodities will push farm products prices up to 50 per cent in the next ten years from their 1997-2007 average, a new UN / OECD study has warned.

The warning, coming after corn, wheat and soyabean prices have risen up to 60 per cent in the last twelve months, reignites the debate on food versus fuel, amid concerns that current first generation biofuel production is not sustainable.

Opec warned recently against biofuels; they may have ulterior motives, but several countries and international groups have expressed their concerns amid higher food prices.

The report, by the United Nation’s Food and Agriculture Organization and the Organisation for Economic Cooperation and Development, added that long-term prices would be up to 30 per cent higher than previously estimated.

"Growth in the use of agricultural commodities as feedstock to a rapidly increasing biofuel industry is one of the main … reasons for international commodity prices to attain a significantly higher plateau," the report said.

Loek Boonekamp, head of the agriculture division at OECD in Paris, told the Financial Times that "biofuel demand creates a fundamental new demand for agriculture commodities that was non existent only five years ago."

"In a context of generally lower global stocks in recent years, this additional demand is expected to underpin prices," the report said. In the last twelve months, corn had risen by 60 per cent, wheat by 53 per cent and soyabean by 40 per cent.

HSBC, one of the world’s biggest banks, has hired Sir Nicholas Stern, who wrote the UK government’s much-discussed report on the economics of climate change last year, to be an adviser to Stephen Green, its chairman. In May HSBC gave the largest donation ever by a UK business to groups researching and trying to tackle climate change and its effects (FT stories may require subscription). 

Other banks including Citigroup and Bank of America have also launched well-publicised initiatives to support the fight against global warming.

One does not have to be a die-hard cynic to observe that trading in greenhouse gas emissions and financing new energy sources, to name just two, create massive business opportunities, and banks that fail to exploit those opportunities are failing their shareholders. But as with many new markets. it is not yet clear where the best opportunities will be, and which activities will end up being rejected as valueless. Which is why we see a group of the leading banks trying to bring some order to the carbon markets.

Pemex, Mexico’s national oil company, has leased a new semi-submersible rig for deep-water drilling in a five-year deal worth almost $1bn. The rig, which is due to be completed by the end of 2009, will be able to operate in 5,000ft of water. Pemex only started exploring the deep water of the Gulf of Mexico in 2004, and is claiming some success in its exploration efforts. The question is whether the company will be able to develop any discoveries that it makes quickly enough.

Mexico certainly needs to do something, because its oil production has been in decline since 2004, according to the BP Review of World Energy. The US Energy Information Administration highlighted the issue in its recent  International Outlook (pages 33-35), which took a much more negative view of Mexico’s future production than last year’s report. The prognosis has got Alan Greenspan worried about the country’s financial future. Cantarell, Mexico’s biggest field which produces about half the country’s oil, is in pretty steep decline, a fact that was predicted by some three years ago.

The problem, however, is that Mexico’s constitution largely forbids investment by foreign oil companies, a position enshrined in Nafta. Felipe Calderon, the president, has suggested he wants to change that. Unless he does, the exploitation of the Mexico’s deep waters is likely to proceed only slowly; probably too slowly to save Mexico from becoming a net oil importer at some point over the next ten years or so.

Europe encompasses the whole spectrum of opinions when it comes to nuclear power. This is well illustrated by the row between anti-nuclear groups in Austria, where opposition to atomic energy is enshrined in law, and champions of nuclear power in the neighbouring Czech Republic. According to the Prague Post,  Czech nuclear enthusiasts have set up the Start Zwentendorf advocacy group to counter (and satirise) the efforts of the Stop Temelín anti-nuclear pressure group in Austria. Zwentendorf, Austria’s only nuclear plant, was built in 1978 but has never been used to generate power as a public referendum that year decided not to launch the reactor and to rule out further nuclear development. Temelín, meanwhile, is the Czech Republic’s biggest nuclear power plant and has become the focus of protests by Austrian anti-nuclear activists, including border-crossing blockades.